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I recently learn that there a type of index called "decrement index".

For example, a MSCI world decrement 4% index will constantly underperform the MSCI world index for 4% every year. A spy decrement 5% index will underperform spy each year.

For details, check:

https://www.msci.com/documents/1296102/24340561/MSCI+Global+4%25+Decrement+Indexes.pdf/d96943e9-b981-cf1b-82d5-c6b6d6dc6f38

If an index fund constantly underperform, why would anyone buy it?

This article suggests that it is because the seller bank want to avoid some dividend risk; however, by direct substracting some dividend from the fund is not attractive to retail customers. So they use a "decrement index" that look like a normal total return index that stealthily substract a fixed amount of money from it. It is highly likely that some customers are unaware of the hidden "decrement" feature, as the most popular decrement index is called "S&P Euro 50 Equal Weight Synthetic 5% Price Index" which does not include the word "decrement" in the name...

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Most equity indexes are "price return" indexes that do not account for reinvesting received dividends. A dividend lowers the price of a stock the same amount, so as companies pay dividends the price of the stock falls accordingly, and thus the value of an index that includes the stock (weighted by price) would fall as well.

A decrement index is used to track against a "normal" index but simulates a fixed withdrawal percentage each year, which is common in fixed-income structured products used by pension funds and other retirement plans. So the MSCI world decrement 4% index would simulate buying the world index and reinvesting dividends but withdrawing (not losing 4% every year).

A fund that tracks this index directly would need to provide a constant 4% divided to track the index, since that's how it's calculated. So while the price return of the index may be less that the base price index if the dividend rate of the stocks is less than 4%, the 4% dividend must be added back, so it should have the same total return as the underlying index, regardless of the dividend that the constituents would pay.

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  • Re Last paragraph: Unfortunately the index fund sold by big banks will usually not pay the 4% dividend annually
    – dodo
    Commented Sep 12, 2022 at 5:36
  • Can you give a link to a specific fund that tracks this index and does not pay a dividend?
    – D Stanley
    Commented Sep 12, 2022 at 13:03

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